Beijing's abrupt decision to tighten monetary policy caught equity markets off guard yesterday, sending Hong Kong and mainland stocks tumbling to their first major declines in the new year. The Hang Seng Index dropped the most in more than six weeks, falling 578.04 points or 2.6 per cent to close at 21,748.6. The sell-off was across the board and dragged half of the benchmark's 42 blue chips down by more than 3 per cent each. Even harder hit was the H-share index, which lost 3.7 per cent to 12,482.18 points, while the Shanghai Composite Index fell 3.1 per cent to 3,172.658 points. While analysts knew Beijing was concerned about an asset bubble, they did not expect it to move so fast. 'The rise in the required reserve ratio came much earlier than expected,' said Steven Leung, a director of institutional sales at UOB Kay Hian. 'So to a certain extent it's normal that people would dump interest rate- related stocks like Chinese banks and Chinese property developers.' Markets opened sharply lower after the People's Bank of China announced on Tuesday evening that lenders had to increase their reserves by 50 basis points to 16 per cent. Investors feared that the central bank may be preparing to turn off the liquidity taps which have been keeping the economy afloat. Beijing has already raised borrowing costs for government bonds. Lenders paced the decline yesterday as China Construction Bank Corp, Industrial and Commercial Bank of China, and Bank of China contributed a combined 161.9 points to the benchmark's loss. Along with Bank of Communications, all four of the major mainland banks dropped at least 3.5 per cent on the day. Henderson Land Development headlined the drop among property stocks, sliding 6.5 per cent to close at HK$56.30. 'The news was of huge damage to the market psychologically,' said Wu Kan, a fund manager at Dazhong Insurance. 'Many investors read the surprise move as a message that China will tighten the monetary policy this year.' Investors scrambled off the sidelines to join the sell-off as turnover nearly topped HK$100 billion for the first time since November last year. 'The news can be digested very quickly,' Leung said. 'And the real impact is not going to last too long, particularly when we see market liquidity is still relatively abundant.' He said that many of his institutional clients still wanted to add equity exposure and would take advantage of any major pullbacks to re-enter the market at better valuations. And he added that the Hang Seng Index might trade within a range of 21,500 to 23,000 in the near term. Meanwhile, John Greenwood, the chief economist at Invesco, said financial tightening across the border was simply a reversal of the temporary cuts made during the recession. '[It's] bringing rates back up to a normal level,' said Greenwood, who is also known as the architect of Hong Kong's pegged exchange rate mechanism. 'Therefore they won't be damaging in any long-term sense.'